Republican Gov. Susana Martinez surprised New Mexico state lawmakers Tuesday with her idea to fix the state's unemployment fund: Withdraw $130 million from the state's savings account and put it into the fund.

It immediately got a cool reception from several prominent Democratic lawmakers.

"It bothers us that you're dipping into those reserves," said Sen. John Arthur Smith, D-Deming, chairman of the Senate Finance Committee. "There's too many questions out there."

Martinez's proposal is the latest salvo in a six-month battle between the governor and the Legislature over how to prop up the state's unemployment benefits fund, which is projected to go insolvent in 2013 without an injection of cash.

Using her line-item veto authority, Martinez killed a provision in a bill that cleared the Legislature earlier this year that would have increased what businesses pay into the fund. Several state lawmakers sued Martinez, saying her action was unconstitutional. But the state Supreme Court declined to rule on the issue, saying the governor and the Legislature could still strike a deal on how to prop up the fund during the current special session.

If Tuesday was any indication, a deal remains far off.

Smith and other prominent Democratic lawmakers said withdrawing money from the state's savings account is too risky during a bad economy.

An accounting error in the Medicaid program, the government's low-income health-insurance program, already is projected to cost the state about $100 million, which would come from the savings account. Add that to other potential obligations, and dipping into the state's savings now isn't the wisest move, critics say.

"The stability of our reserves is tied to our bond rating and our ability to pay things off," said Sen. President Pro Tem Tim Jennings, D-Roswell.

Wall Street rating agencies consider how much a state keeps in its savings account when figuring out how to rate the state's creditworthiness. A state tucking away much less than 5 percent over and above what it expects to spend can lead to talk of a lower bond rating, the lawmakers said. A lower bond rating usually increases the cost of borrowing for a state.

Currently, New Mexico has between 8 percent and 9 percent — or more than $400 million — in its savings account. The percentage is based on the $5.4 billion New Mexico expects to spend this year.

Tom Clifford, Martinez's secretary of the Department of Finance and Administration, acknowledged the lawmakers' concerns Tuesday, but said, "Folks have not seen the bill as drafted."

Under the governor's proposal, rather than write a single $130 million check on the state's savings account, the state would make two withdrawals over two years — $65 million this year and $65 million the year after, Clifford said.

Withdrawing $65 million this year would drop the state's savings account to about 7.8 percent in savings, Clifford said. Another $100 million withdrawal because of the Medicaid accounting error would leave the reserves well above the 5 percent threshold this year.

But state lawmakers weren't persuaded, saying there are too many unknowns.

Jennings and other state lawmakers said they worry that recent projections of the amount of future tax revenue expected to come in are too optimistic. If the projections are wrong, the state would need to dip into its savings account to pay expenses.

"It would be one thing if this is money we had in the bank," Smith said. "This is not money we have in the bank. This is money we expect to come in. And we've been wrong in the past."

Rep. Luciano "Lucky" Varela, D-Santa Fe, said that if Martinez and state lawmakers don't reach a deal during the special session, of course the state's top court could always settle the issue.

"The Supreme Court will make a decision as to what action on the lawsuit we took before" the justices, he said.

Contact Trip Jennings at 986-3050 or at tjennings@sfnewmexican.com.